A ‘Dual Economy’?

July 24, 1961

If you want a quick reputation as a brilliant economist, the formula is simple. Just put forward “new” reasons for still more government intervention, more government spending, and more inflation.

This was the secret of the enormous success of Lord Keynes. The theories of J.K. Galbraith have superseded those of Keynes because where Keynes advocated more government spending and controls only periodically, to combat mass unemployment, Galbraith advocates them as permanent and uninterrupted policies.

Galbraith wants to siphon more and more purchasing power out of the “private sector” of the economy and into the “public sector.” Individuals who earn their own incomes, he argues, only spend them in trivial and foolish ways. Let the politicians seize more and more of the individual’s income and spend it as their own infinite wisdom dictates.

Alvin H. Hansen, the former Harvard economist, has now solemnized this theory with a new name—“the dual economy.” He agrees that private spending must be supplemented by massive Federal spending. The “private sector” and the “public sector,” he argues, support each other by mutual “exchange” just as do manufacturing and agriculture. Each sector “contributes to the total flow of real income and each takes its share out of the income stream either by charging a price or by collecting a tax.” Hansen can see no essential difference between voluntarily paying a price for something one wants and being forced to pay a tax for something one may not want nor even get.

THAT ‘PUBLIC SECTOR’

In the summer issue of the New Individualist Review, Murray N. Rothbard subjects this concept of the “public sector” to realistic dissection. He points to its “hidden assumptions: That the national product is something like a pie, consisting of several ‘sectors,’ and that these sectors, public and private alike, are added to make the product of the economy as a whole. In this way, the assumption is smuggled into the analysis that the public and private sectors are equally productive, equally important, and on an equal footing altogether.”

But Rothbard goes on to point out the profound differences. Government acquires its revenues by coercion and not by voluntary payment. “Production” has a dubious meaning unless it means the production of things consumers demand and willingly buy. “In the private sector, a firm’s productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government’s ‘productivity’ is measured . . . by how much it spends!”

ADD OR SUBTRACT?

The truth, contends Rothbard, is that far from adding to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. It directs production not toward but away from the needs of individual consumers. In brief, the public sector is “anti-productive; it subtracts from, rather than adds to, the private sector of the economy.”

(I should like to add my own note that, while it may be reasonable to assume that certain necessary governmental services, like police and fire protection, add to national production, there is no possible way of determining how much they add. Of course schemes like foreign aid and subsidizing farmers to reduce output clearly reduce our national output and income.)

Rothbard also pays his respects to Galbraith’s argument that private wants are all artificially induced by business advertising which automatically “creates” the wants it supposedly serves. If this were so, Rothbard points out, there would be no need whatever for the almost frantic concentration of business on “market research”—no reason to fear that one might make a product that people would not buy. As Rothbard remarks in conclusion, Galbraith is curiously silent on the enormous amount of propaganda by government.

Yet the Keynes-Galbraith-Hansen myth of the “dual economy,” with its two chief “sectors,” has become the new rationalization for a program of reckless and irresponsible spending that must inevitably lead us toward an inflationary crisis.